>JYOTHY LABORATORIES: Growth in Maxo & Exo

 Revenue recognition in-line with expectations: Jyothy Labs (JLL) recorded standalone revenue growth of 70.6% yoy aided by 92% yoy growth in Exo and 105% yoy growth in Maxo. The fantastic growth numbers for Maxo has to be viewed in context to last year’s low base (~7% trader margin, which was discontinued in Maxo coil category last year, has been reinstated). Exo’s growth is primarily on account of increase in market share with ~90% revenue contribution from institutional sales, resulting in volume growth increase (volume market share for Exo has increased from 21% in June 2011 to 25.6% in June 2012 in South India). The cash cow, Ujala franchise registered revenue growth of 25% yoy.


 New Management team on board; re-launches Pril and Margo: On yoy basis, JLL reported margin expansion of 302bp, aided by decrease in staff cost (down 531bp), and other expenses (down 475bp). We believe, margin comparison for JLL will be relevant on qoq basis owing to–(1) Majority of Henkel staff were laid off in order to make the two companies (Henkel acquired and JLL) leaner for smooth integration, (2) new management team has been recruited to facilitate revenue recognition from Henkel’s acquired brands and (3) JLL management has committed to higher advertisement and promotional spends for all its brands. Hence, sequentially JLL has reported a margin contraction of 487bp on account of higher staff cost (up 362bp; there is also a provision of ~Rs5cr as write off cost for Karikal plant employees) and higher A&P spends (up 315bp).


 Yoy comparison of earnings not very relevant for analysis purpose: JLL has taken loan from Axis bank for the purpose of paying off Henkel’s debt. As a result, JLL charges interest income from Henkel (reported in other income; ~Rs15cr) and pays off interest expense from its own books. This is not visible on yoy numbers for JLL, however, one can see this reporting in the sequential numbers. Hence, on qoq basis, earnings came in lower by 36.9% primarily on account of trickle-down effect of margin contraction.


Outlook and Valuation
We value the company on a consolidated level. In view of the weak monsoons directly affecting the revenue for Maxo, we have tweaked our revenue estimates downwards by ~1% over FY2013-14E. With JLL management taking price hikes across its portfolio (~7% weighted average price hike taken in 4QFY2012 and ~10% price hike taken across Henkel portfolio in April 2012) and focusing on increasing sales of Pril, Fa deodorant and Henko detergent, we believe Henkel will be a primary incremental revenue driver for JLL going ahead. We factor revenue of ~Rs448cr in FY2013E and ~Rs484cr in FY2014E from Henkel into our numbers. The laundry business of the company, JFSL, is also performing above expectations; we factor-in revenue of Rs49cr in FY2013E and Rs57cr in FY2014E. We value the stock at a discount to its peers (higher rural led sales, which may soften on account of high inflation and low monsoon) and recommend a Reduce on the stock with a target price of Rs110.


Risks to the view
 Faster and successful integration of Henkel holds an upside to our estimates
 Debt repayment and stabilized core business of JLL will warrant a re–rating of the stock.




RISH TRADER